AVATAR BUSINESS VALUE ANALYSIS: A METHOD FOR THE EVALUATION OF BUSINESS VALUE CREATION IN VIRTUAL COMMERCE

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Nov 14, 2013 (3 years and 6 months ago)

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Journal of Electronic Commerce Research, VOL
9
, NO
3
, 20
08

Page
207

AVATAR BUSINESS VALU
E ANALYSIS: A METHOD

FOR THE EVALUATION
OF BUSINESS VALUE CR
EATION IN VIRTUAL CO
MMERCE



Reina Yahya Arakji

Department of Computer Information Systems

Zicklin School of Business

Baruch College, CUNY

New York, NY 10010
, United States

reina_arakji@baruch.cuny.edu



Karl Reiner Lang

Department of Computer Information Systems

Zicklin School of Business

Baruch College, CUNY

New York, NY 10010
, United States

karl_lang@baruch.cuny.edu




ABSTRACT


The recent years have seen the emergence of a number of virtual worlds with various designs and purposes.
Some have become very popular and have developed growing in
-
world economies. Real
-
world busin
esses are
increasingly experimenting with doing virtual business there as well. In this paper, we present Avatar Business
Value Analysis, a novel theoretical framework and a computational method and decision tool to help evaluate and
strategically manage b
usiness value creation inside synthetic environments, and show how it can be applied to
cost
-
benefit analysis in practical settings. The decision
-
tree
-
based method includes traffic metrics that may be used
to empirically estimate the business value of virt
ual commerce ventures. We also investigate some intangible factors
that are impacting these metrics in the context of the particular case of the virtual world
Second Life

and discuss
their implications. We conclude by outlining strategies that could be con
sidered by the operators of virtual worlds
and the real corporations in order to promote sustainable virtual business in synthetic environments.


Keywords:

business strategy, business value creation, online marketing, second life, traffic metrics, virtual

commerce, virtual worlds.


1.

Introduction

The recent years have seen the emergence of a number of virtual worlds with various designs and purposes.
These worlds have found large user bases and growing member communities.
Massively multiplayer online gam
es

(MMOGs) have been playing the pioneering role in bringing these synthetic worlds out of the subculture of
computer geeks into the mainstream Internet
-
based business domain. As synthetic worlds are becoming more
popular, they are developing advanced in
-
w
orld economies [Castranova 2005] by offering users the opportunity to
conduct a variety of virtual business activities that we refer to as
virtual commerce
, or v
-
commerce. Besides
academic fascination with virtual economies and the possible spillovers to t
he real world economies, existing
companies, online and offline, are investigating the means that would allow them to leverage the nascent virtual
markets to their own advantage [Hemp 2006]. Since innovative use of new forms of electronic business can impr
ove
firm performance [Zhuang 2005], many Fortune 500 companies are rushing to establish some presence in virtual
places like Linden Lab’s
Second Life
[Mennecke et al. 2007]. In addition to creating brand awareness that may
translate into eventual sales of
real products in the real world, these companies are aiming to understand the
concealed needs of their current or potentially new customers. Understanding deep
-
seated desires, which may
openly be expressed in virtual settings, may help the companies in bet
ter serving customers not just in the virtual but
also in the real world. Many of these companies are also anticipating a new source of income by directly selling
virtual products and services to the inhabitants of the virtual world.

1.1. Research Questio
ns

Our research is motivated by the need to understand business value creation inside virtual environments,
specifically business value that derives from traffic to virtual stores. There is no established theoretical body or
empirical work to ground resear
ch in this emerging field yet. The literature also lacks appropriate measures that
would allow the assessment of the value of virtual world business ventures [Barnes 2007]. We do not address in this
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article the business model of owning and operating a virt
ual world. We rather concentrate on existing real
-
world
companies setting up a presence and conducting virtual commerce inside an established virtual world run by an
operator such as Linden Lab. The article’s main research question is: “How can we assess t
he business value created
inside a virtual world, and how does that value translate into tangible benefits in the material world?” The purpose
of the paper is to propose a novel theoretical framework that conceptualizes the business problem of value creati
on
in virtual worlds, and to contribute an original computational method and decision aid that can be employed by
management to support virtual business investment and strategic management decisions. In our analysis, we
concentrate on Linden Lab’s
Second L
ife

virtual world as our chief case in point. Since a multidisciplinary approach
is appropriate for studying synthetic environments [Bray & Konsynski 2007; Roche 2007], we address the
technology, social, economic and legal aspects of virtual worlds in our
article. Virtual worlds in general have not yet
reached the required level of maturity that would leave a lasting impact on the way companies conduct business with
their existing or potentially new customers. By drawing lessons from the case of
Second Life
, our analysis may assist
real businesses in devising effective strategies for their future virtual world ventures.

1.2. Organization

In section 2, we present an overview of virtual worlds in general and Linden Lab’s
Second Life

in particular. In
section
3 we develop our theoretical framework of business value creation inside synthetic environments. The
framework includes Avatar Business Value Analysis, a decision
-
tree
-
based method for analyzing traffic metrics that
may be used to empirically estimate the

business value of virtual stores. We investigate in section 4 factors that are
impacting these metrics in the specific case of
Second Life

and outline strategies that could be considered by the real
corporations in order to improve their virtual world ope
rations. In section 5, we draw lessons from the case of
Second Life

and offer a set of success factors for achieving mature and sustainable v
-
commerce environments.


2.

Virtual Environments

The first notion of synthetic worlds did not start in the computi
ng world, but rather in the realm of
science
-
fiction literature. In
Brave New World

[Huxley 1932] and
The Three Stigmata of Palmer Eldritch

[Dick
1965], people experience under the influence of pharmaceutical products a virtual reality different from their

own
real existence.
Neuromancer
[Gibson 1984] and
Snow Crash

[Stephenson 1992] replaced pharmaceutical technology
with networked computing technology as the means to create and access alternative worlds.
Neuromancer

refers to
the cyberspace interpretation

of computer networks, while Snow Crash revolves around the
Metaverse
, a
virtual
-
reality successor of the Internet.

The vision of science
-
fiction writers is already materializing in MMOGs and other virtual environments. In
addition to playing, users may s
ocialize, trade and even earn incomes in such spaces. This has paved the way for a
new attractive way of accessing the Internet through the point of view of an
avatar
, which is the virtual
-
self, or
graphical representation of the user. Experts predict that

soon enough “our gateway to the Internet will look more
and more like a videogame and less like a book” [Bradley et al. 2005; Castranova 2001].

Even though the majority of MMOGs are of the fantasy or role playing genre, there are niches in the
science
-
fic
tion, combat simulation and social interaction segments as well. Social interaction games may be adopted
by consumers to satisfy various needs and desires. Some users may be interested in the fantasy aspect of the games,
considering virtual worlds as means

for virtual escapism from real life pressure. They may even visit virtual worlds
to take part in hedonistic activities that they may or may not associate with in real life. Others may also consider
synthetic worlds as social spaces for self
-
expression and

meeting like
-
minded people, as platforms for engaging in
artistic creativity, or as public places for civic organization and governance. In fact, purely social interaction games
such as Linden Lab’s
Second Life

and Makena Technologies’
There
are the close
st to Stephenson’s original notion
of the
Metaverse
and are promoting the establishment of advanced virtual economies. Companies are therefore
increasingly considering virtual worlds as a new frontier for doing online business with current or new customers
.
We draw in this article primarily on social interaction places, and in particular on
Second Life
, to motivate and
illustrate our theoretical analysis, rather than on role playing games that have set plots and rules.

2.1. Linden Lab’s Second Life

Launche
d in 2003,
Second Life

is a three
-
dimensional virtual world where content creation is largely the
responsibility of the inhabitants [Ondrejka 2005].
Second Life

residents are encouraged to buy or rent virtual land
and create various types of virtual world
content and virtual goods. Since the residents retain the intellectual
property right
s

to their personal creations, they can trade with other residents using
Second Life
’s official currency,
Linden dollars (L$). Linden dollars can be converted to real US d
ollars on the LindeX currency exchange market,
and a total of USD 7.6 million was exchanged for Linden dollars in the month of December 2007 alone [
Second Life

Virtual Economy Key Metrics 2008].

Recognizing the economic opportunities that are materializing

inside
Second Life
, many real businesses are
implementing v
-
commerce initiatives, trying to gain early
-
mover advantage in what could become a revolutionary
way of conducting business online. Organizations such as Toyota, Circuit City, Dell, Sears, Adidas,

and many
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others, have all opened virtual stores in
Second Life
, expecting to better understand and connect with consumers, to
reach new potential customers, and to create and increase brand awareness. While some companies have set up fully
transactional v
irtual stores, many only allow the avatars to interact with the virtual products and services that are
presented without offering them the chance to actually buy anything. Others organize promotional and social
activities that are more related to image rat
her than specific products directly. Such companies are focusing on brand
awareness aiming to engender indirect sales for their products, either physical or digital, in the real world. In
addition to brand awareness, companies such as American Apparel that

sell virtual versions of their existing real life
products for avatars to wear in the virtual world, also aim to generate direct revenues from the sale of the virtual
goods.

The professional business and technology trade press were quick in opening virtua
l bureaus to file reports from
inside the synthetic world. They ran cover stories on
Second Life
, discussing how users may have alternative virtual
identities and how some have become entrepreneurs [e.g. Hof 2006]. The press even heralded
Second Life

as a
future
revolutionary medium for conducting electronic commerce in a three
-
dimensional setting. Empirical data from
current industry research studies, however, indicate that virtual shops are mostly empty [La Plante 2007], generate
very little business valu
e, have limited profit growth potential and 90% of them fail within 18 months [Gartner
2008]. The business and technology press that originally ran cover stories on
Second Life
, proclaiming that it has a
thriving virtual economy that is attracting real cor
porations, is now dismissing it as just hype [Rose 2007].
Numerous academic researchers are also already doubting their value for real businesses [Clemons et al. 2007] and
predicting their demise [Noam 2007]. Overall, it largely remains inconclusive whethe
r companies are getting
positive returns on investments they make in virtual stores and whether virtual world commerce is viable in the long
run.


3.

Avatar Business Value Analysis

Despite the recent negative reviews in academic and business publications
, companies continue to explore
v
-
commerce possibilities. Even if company executives are not sure yet of the kinds of benefits they can obtain from
such initiatives, they do anticipate that virtual worlds will play a vital role in reaching the millennial g
eneration that
is enormously at ease in online social network and synthetic environments [Kobayashi
-
Hillary 2007]. We next
present Avatar Business Value (ABV) Analysis as a novel framework that companies can use in order to assess the
business value of the
ir virtual world initiatives and devise more effective v
-
commerce strategies. We anchor the
AVB Analysis framework in the electronic commerce and marketing literature on internet shopping. It is related
specifically to Web Chain Analysis, an area that aims

to evaluate the value of commercial web sites [Hanson &
Kalyanam 2006]. Web Chain Analysis has been applied, in particular, to the analysis of the relationship between
online advertising and web site traffic and e
-
commerce sales.

Avatar Business Value An
alysis, as a concept, is similar to Web Chain Analysis in terms of motivation and
methodology, but different in terms of its specific method, which is designed to support v
-
commerce analysis
(business inside virtual worlds) rather than e
-
commerce analysis
(business on conventional web sites). ABV
Analysis hence includes a formal representation of the events and decisions taken by an avatar (and subsequently the
real person behind the avatar) as a result of interacting with a virtual store.

The framework e
nables real companies to measure the potential benefits of their virtual presence in a virtual
world. Virtual presence may be in the form of a virtual advertisement or product placement that the inhabitants
encounter when visiting different areas of the wo
rld. It may also be in the form of a full
-
fledged virtual store
presenting virtual merchandise or offering some business
-
sponsored virtual activities [Vedrashko 2006]. We do not
analyze product placement, mini
-
games or virtual advertisements but focus on t
he business value that may be
created through the establishment of virtual stores. We distinguish in this article, as shown in Table 1, between
virtual stores (places to conduct v
-
commerce), web stores (places to conduct e
-
ecommerce), and brick
-
and
-
mortar
stores (places to conduct physical commerce). Both virtual stores and web stores exist online on the Internet. A
virtual store is a three
-
dimensional representation of a brick
-
and
-
mortar store inside a virtual world. A user can only
interact with the virtu
al store through his avatar. A web store on the other hand is a two
-
dimensional representation
of a brick
-
and
-
mortar store that is identified by a URL.

We thus differentiate in this article between virtual business and real business, and likewise between
the virtual
commerce operations and real operations of an organization. V
-
commerce refers to any operational business
transactions and business activities inside a virtual store that supports the sale of virtual goods, and generates virtual
revenues in vir
tual currency such as
Second Life
’s Linden dollars (L$). Real operations on the other hand take place
either online (e
-
commerce operations related to a web site) or offline (physical operations related to a
brick
-
and
-
mortar store). They involve the sale of

real goods, digital or physical, intended for use in the material
world. The sale of real goods generates revenues in real currency such as US dollars. Likewise, we distinguish
between virtual customers, typical online customers or internet shoppers, and
physical customers. Virtual customers
are avatars that interact with virtual stores, while online customers visit web sites and physical customers go to
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brick
-
and
-
mortar stores. Since a user may have more than one avatar in a virtual world, a single real c
ustomer may
embody multiple virtual customers.


Table 1
.

Commerce Categories

Commerce Type

Location

Customer Type

Income Type

Virtual Commerce

Virtual Store in a Virtual World

Avatar

Virtual and/or

Real Currency

Electronic
Commerce

Webstore, or Conven
tional E
-
Commerce Ready
Website

Internet
Shopper

Real Currency

Physical Commerce

Brick
-
and
-
Mortar Store

Physical Person

Real
Currency


ABV Analysis is based on a decision tree that models an avatar moving around a virtual world. We define and
interpret
the probabilities of possible events or actions that can occur during the interaction of an avatar with a
virtual store
1
. All tree diagram paths ultimately lead to quantifiable outcomes, allowing us to calculate the expected
business value of opening a vir
tual store in a virtual world.

The following illustrates the series of decisions faced by a virtual customer when he notices a virtual store. If
the avatar chooses to enter the virtual store, he may buy a virtual product by paying in virtual currency. Whe
ther the
avatar buys a virtual product or not, visiting the virtual store creates brand awareness and the real user that owns the
avatar may visit and purchase products for use in the material world from the company’s web or brick
-
and
-
mortar
stores at a la
ter point in time. We assume that corporations aiming to sell their real products need to direct the users
towards their web or brick
-
and
-
mortar stores to finalize the transactions
2
. Our tree diagram therefore does not
include real transactions (e.g. purch
asing with a credit card a product intended for use in the real world) through
virtual stores.

3.1. Entering a Virtual Store

The first event in the tree diagram in Figure 1 describes an avatar that is strolling inside the virtual world and
passing by a vi
rtual store. For psychological or technical reasons, the avatar may not notice the virtual store of a
particular company [Benway 1998] despite any efforts that the company may make to attract avatar attention. We
call the probability of this occurring NNR;

the
No Notice Rate
. There is zero value for the real company when
avatars do not notice its virtual store.

If the avatar does notice the virtual store, he may choose to enter and talk to the store avatar representatives or
interact with some of the presen
ted virtual products. This occurs with a probability of (1
-
NNR)*(VSER), where
VSER, the
Virtual Store Entry Rate
, is the probability of an avatar entering the virtual store that he notices. There is
also the possibility, with a probability of (1
-
NNR)*(1
-
VS
ER) that the avatar may notice but choose not to enter the
virtual store. In that case, the only value accruing to the real company is increased brand awareness. Since the tree
diagram covers all possible steps taken as a result of strolling inside the vir
tual world, the probabilities of not
noticing the virtual store, noticing but not entering, and noticing and entering the virtual store add up to 1.

3.2. Purchasing a Virtual Product

When an avatar enters a virtual store and interacts with the virtual stor
e representatives, other avatars, or the
virtual products offered for sale, he becomes a prospective virtual customer. A prospective customer may buy a
virtual product with virtual currency. The added business value to the corporation is brand awareness fr
om buying
the virtual good, in addition to virtual revenues in virtual currency. The probability of a virtual product sale is PCR,
or
Prospect Conversion Rate
. A prospective customer may also choose not to buy anything, with a probability of
(1
-
PCR). The a
dditional business value of such a choice at this stage of the decision tree is just the increased brand
awareness.





1

The names we have chosen to give to these newly defined constructs are original, but whenever possible we have
incorporated terms from the electronic marketing literature that describe analogous concepts in web site

traffic
analysis [see, e.g., Hanson & Kalyanam 2006]

2

We omit possible e
-
commerce capabilities that would allow virtual customers to order real products in virtual
stores for the sake of simplicity. It could be easily incorporated in our method without c
hanging our principal
analysis.

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Figure 1.
Business Value of a Virtual Store


3.3. Purchasing a Real Product

Whether the avatar purchases a virtual product or not, there
is still the possibility that the virtual store
experience will prompt the user behind the avatar to visit a web store or brick
-
and
-
mortar store at a later point in
time. The probability of this occurring is IRVR, or the
Induced Real Visit Rate
. Visiting a

virtual store may not lead
to any further action with zero added
-
value to the company. The probability of no further action is (1
-
IRVR). If the
user decides to visit a real store, he may buy a real good, with a probability of (IRVR*IRPR), where IRPR is th
e
Induced Real Purchase Rate
. This adds real revenue
3

to any business value accrued up to this point. Business value
creation is maximized in the special situation where the user buys a real good after his avatar buys a virtual one. If
the user experiences

a real good but decides not to buy it, he will still become acquainted with the company’s
products, which increases his brand awareness, the sole added
-
value at this point of the tree
-
diagram. The
probability of this happening is (IRVR)*(1
-
IRPR).

It is w
orth noting here that IRVR and IRPR of a user who bought a virtual product may be different from IRVR
and IRPR had the same user not bought the virtual good. The probabilities of a customer visiting a real store or
buying a real world product may, for exam
ple, be higher if his avatar had chosen to buy the virtual version of the
product first. For simplicity, we use the same rate whether the avatar buys a virtual good or not prior to visiting a
real store. We furthermore do not take into account any differen
ces between the conversion rates of web and
brick
-
and
-
mortar stores since consumers are increasingly integrating multiple channels in their purchasing behaviors
(in other words they may check an item on a company’s web store before buying it from the brick
-
and
-
mortar store,
or they may test a product in a brick
-
and
-
mortar store before ordering it online) [Yoram et al. 2002].





3

The company may wish to use a measure other than real revenue (for e.g. real gross profit) to account for the value
accruing from a real purchase. Bhimani (2004) is a good start for understanding the issues concerning the

management accounting implications of the digital economy.

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3.4. Business Value Computation

ABV Analysis supports the calculation of the value of any part of the chain of events illustrated by

the decision
tree. This in turn allows the computation of the business value of virtual stores and the evaluation of specific
company strategies. This however necessitates the estimation of the probabilities NNR, VSER, PCR, IRVR and
IRPR. Similar to marke
t research in conventional online advertising, these may be obtained from different sources,
including traffic data supplied by the virtual world operator, clickstream analysis generated from the company’s web
store databases, or the results of general mar
keting experiments and surveys conducted by the company or market
research firms. Following the estimation of the parameters, the costs of setting up a virtual presence in a virtual
world such as
Second Life

may be compared to its expected benefits to gaug
e whether investing in a virtual store
would increase the real company’s value or not.

A key measure that businesses need to take into account is the
Expected Value of the Virtual Store

(EVVS). It is
obtained by multiplying virtual world traffic by the
Exp
ected Value of an Avatar Contact

(EVAC).


(1)



EVVS


=


store traffic * EVAC







Virtual world traffic figures are bounded by the total number of active residents of the virtual world. EV
AC

is
calculated by summing up the probability of occurrence of all

events multiplied by their monetary outcome, denoted
by O
i
, 1< i < 8, in Figure 1. The outcomes may include virtual revenue, real revenue, and brand awareness. Virtual
revenue and real revenue figures can readily be forecasted using the prices associated
with the company’s virtual
and real product portfolios. Strengthening the brand name of the real company may also be quantified by indirectly
measuring its effects on various aspects of business operations such as improved efficiency in market relations,
i
ncreased market share or the ability to command premium prices [Keller 1993].


(2)



EVAC

=

(1
-
NNR)*(VSER)*PCR*IRVR*IRPR*O1







+ (1
-
NNR)*(VSER)*PCR*IRVR*(1
-
IRPR)*O2







+ (1
-
NNR)*(VSER)*PCR*(1
-
IRVR)*O3







+ (1
-
NNR)*(VSER)*(1
-
PCR)*IRVR*IRPR*O4

+ (1
-
NN
R)*(VSER)*(1
-
PCR)*IRVR*(1
-
IRPR)*O5

+ (1
-
NNR)*(VSER)*(1
-
PCR)*(1
-
IRVR)*O6

+ (1
-
NNR)*(1
-
VSER)*O7






(
We exclude O8 from the calculations since O8=0)


The computation of EVVS is meaningful when a business also forecasts the
Expected Costs of Setting up and
M
aintaining a Virtual Store

(ECVS). Whenever a real business is interested in expanding its operations into a virtual
world, calculations that yield an expected value of a virtual store exceeding its costs (EVVS


ECVS > 0) indicate
that the virtual world v
enture is worthwhile. On the other hand, calculations that yield an expected value of a virtual
store not covering its costs (EVVS


ECVS < 0) suggest that the company should reconsider its decision of having a
presence in the virtual world (Figure 2).











Figu
re 2.

Long
-
term Strategic Decision Rules


For businesses with established virtual world operations, the calculation of EVVS on a regular basis provides a
quantifiable assessment of the various sources of business value created by a virtual sto
re. It therefore assists
companies in identifying potential sources of strength or weakness in their operations, and can be used to improve
v
-
commerce performance. The businesses may also be interested in calculating EVAP, the
Expected Value of an
Avatar P
rospect
. While EVAC denotes the expected benefit from a virtual customer that notices, but may or may
not enter a virtual store, EVAP measures the expected benefit from an avatar that does enter a virtual store and who
hence experiences the virtual goods o
n offer and becomes a virtual customer prospect.



EVVS
-

ECVS ≥ 0


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(3)



EVAP

=

(1
-
NNR)*(VSER)*PCR*IRVR*IRPR*O1







+ (1
-
NNR)*(VSER)*PCR*IRVR*(1
-
IRPR)*O2







+ (1
-
NNR)*(VSER)*PCR*(1
-
IRVR)*O3







+ (1
-
NNR)*(VSER)*(1
-
PCR)*IRVR*IRPR*O4

+ (1
-
NNR)*(VSER)*(1
-
PCR)*IRVR*(1
-
IR
PR)*O5

+ (1
-
NNR)*(VSER)*(1
-
PCR)*(1
-
IRVR)*O6


If virtual customer prospects do buy a virtual product for the first time, the real companies may also wish to
predict their lifetime value. Ongoing interaction with customers is central to AVB Analysis, especia
lly since
advances in social computing platforms and services have shifted the interaction between a firm and its customers
away from transactions and towards relationships [Sheth and Parvatiyar 1995].

A customer lifetime value is the
present value of futu
re cash flows attributed to the customer [Berger and Nasr 1998]. In the context of virtual
environments, we define
Virtual Customer Lifetime Value

(VCLV) as the present value of future cash flows, both
virtual and real, attributed to an avatar.

The calcul
ation of VCLV is rather complicated in special cases where one real customer corresponds to
multiple virtual customers (i.e. a single user has multiple identities in the same virtual world). In such cases, the
problem of attributing the real revenues and b
enefits from brand awareness to more than one avatar arises. However,
for the standard case of users who own a single avatar, the calculation is as follows:

(4)




VCLV


=







T
t
t
t
t
t
t
t
t
r
RC
VC
RR
VR
1
)
1
(
)
(


where VR and RR are the
virtual

and
real revenues

attrib
uted to a single virtual customer. VC denotes the
virtual
costs

of interacting with a virtual customer, such as the costs of virtual representatives assisting the avatar in the
virtual store. RC on the other hand are the
real costs

of assisting the user be
hind the avat
ar in any interactions he
may have with the company in real life. γ is the
Virtual Customer Retention Rate

and r
t

is the
discount rate
. Since
virtual customers may have diverse spending patterns and service needs, the real businesses may find it more
pra
ctical to divide their virtual customer base into segments and calculate VCLV for each segment. The companies
may then identify the most profitable virtual customers and invest in retaining the avatar segments with the highest
VCLVs.

As mentioned earlier,
some virtual stores may not sell any virtual goods, only showcasing the virtual products
or offering other promotional in
-
store activities. Such promotional stores are currently the majority of virtual stores
in most virtual worlds. Their value is mainly i
n branding, building familiarity with and generating real sales of
current or future real product offerings. In these cases, our analysis could be simplified and calculating EVVS, EVP
and VCLV would be slightly different.


(5)


EVAC (for virtual stores that pr
esent but do not sell virtual goods)





=

(1
-
NNR)*(VSER)*IRVR*IRPR*O4






+ (1
-
NNR)*(VSER)*IRVR*(1
-
IRPR)*O5






+ (1
-
NNR)*(VSER)*(1
-
IRVR)*O6






+ (1
-
NNR)*(1
-
VSER)*O7

(6)



EVAP (for virtual stores that present but do not sell virtual goods)





=

(1
-
NNR
)*(VSER)*IRVR*IRPR*O4






+ (1
-
NNR)*(VSER)*IRVR*(1
-
IRPR)*O5






+ (1
-
NNR)*(VSER)*(1
-
IRVR)*O6

(7)



VCLV (for virtual stores that showcase but do not sell virtual goods)

=






T
t
t
t
t
t
t
t
r
RC
VC
RR
1
)
1
(
)
(



4.

Avatar Business Value Analysis for Strategic Management o
f V
-
Commerce Operations

In this section, we illustrate how real companies can employ ABV Analysis concepts to evaluate and
strategically manage their v
-
commerce operations. Based on evidence from our case analysis of
Second Life
, we
analyze the factors th
at are currently negatively impacting the performance metrics (as summarized in Table 2) and
ultimately the business value of virtual stores in terms of the measures EVAC, EVAP and VCLV developed in prior
sections. While our method is designed to quantify
the tangible outcomes from running virtual stores, there are
other, intangible factors that play a role in determining success or failure. Some of these will be briefly discussed
next.



Arakji

& Lang:
Avatar Business Value Analysis

Page
214

Table 2.

Strategic Management of Key Avatar Business Value Analysis

Model Parameters

ABV Model Parameter

Factors Affecting the Parameter in the
Current
Second Life

(SL) Setting

Recommended V
-
Commerce Strategy
Responses

VSER: Virtual Store
Entry Rate






SL client in
stability when large groups
of
avatars are in one sing
le location



Mistrust among many virtual world
users towards real corporate interests
inside SL




Lobbying SL for client upgrades



Adding value to the avatar experience
inside SL, which would help build trusted
relationships between the user
communities and r
eal businesses

PCR: Prospect
Conversion Rate



SL client crashes and security breaches



SL virtual property policy



Virtual goods offered for sale are often
replicas of existing real products and
hence do not add value to possible
fantasy element in SL




Lobb
ying SL for client upgrades



Lobbying SL for an internal governance
structure and better virtual property
guarantees



Innovating virtual goods that target
fantasy elements in SL and that may have
no counterpart in real life

IRVR: Induced Real
Visit Rate




F
requent SL client crashes



Lobbying SL for client and system
platform upgrades


IRPR: Induced Real
Purchase

Rate







Fantasy element in avatar virtual
purchases may not translate to real
purchases



Technological challenges in conveying
real product texture
and scents in
virtual replicas




Researching the nature of virtual
identities



Encouraging research in tactile and
olfactory virtual world technology



4.1. Business
-
Related Factors

The virtual store entry rate VSER is likely negatively affected by the dis
trust exhibited by
Second Life

residents
towards in
-
world corporate investments. In fact, inhabitants of
Second Life

generally still consider it primarily as a
place where they can interact with other residents, and possibly as an environment that allows t
hem to exercise their
creativity and design and trade in virtual goods. Many are suspicious of real corporations that build virtual stores and
set up giant advertising billboards in
Second Life

public spaces. They consider such practices an unwelcome
invas
ion of their community. A number of real businesses have also overestimated the prospect conversion rate PCR
when setting up their virtual world operations. Most of the presented virtual goods are basically virtual replicas of
existing physical items for u
se inside the virtual world. These virtual reproductions of actual physical objects are
intended to generate brand awareness, but how avatars respond to these items largely depends on whether the users
behind the avatars are importing their social behavior

and values to
Second Life

or merely inventing a new fantasy
life. Users that have avatars fashioned after their actual physical features may, for example, be interested in buying a
Mercedes
-
Benz in
Second Life

as an indication of their virtual wealth. Fur
ries, a community of anthropomorphic
animal avatars, are on the other hand less likely to be motivated by the status symbol of an expensive car, but may
be inspired by a completely different kind of product design.

The induced real purchase rate IRPR may a
lso be overestimated by the companies currently running virtual
stores in
Second Life
, sometimes because they misunderstand the nature of virtual identities. Some organizations in
fact venture into
Second Life

with the explicit objective of better understa
nding their target audience and connecting
with virtual consumers. These organizations hope that the users who interact with or buy virtual goods will
eventually purchase their physical world counterparts. It is important to realize that even if interactin
g with a virtual
copy of a real product is an improvement over examining its specifications on a picture posted on a web store
[Childers et al. 2001], current technological limitations do not allow virtual products to convey textures or scents to
the users

behind the avatars [Lui et al. 2007]. The present technological challenges therefore hamper the potential
connection between experiencing virtual products and purchasing real goods [Levin et al. 2005]. This connection
also largely depends on a mass of use
rs that build their virtual lives as a replica of their real existence, or at least on
users that transfer most of their real identity elements to their virtual lives. This notion may not hold with many
virtual world residents, who are attracted by the pos
sibility of living a
Second Life

very different from their own. It
is therefore unwise to assume that the behavior of avatars in virtual worlds has much bearing on their actual
purchases in the real world [Clemons 2008]. Users who buy a virtual product may

have no desire for its real
-
world
counterpart.

Journal of Electronic Commerce Research, VOL
9
, NO
3
, 20
08

Page
215

4.2. Operator
-
Related Factors

In addition to company specific strategic factors, the business value of virtual stores is jeopardized by
Second
Life
’s current perceived lack of traffic critical mass. Achievin
g critical mass, or a minimum number of users to make
subsequent adoption of a technology self
-
sustaining, is vital for innovations that are of an interactive nature [Rogers
1995] and also significantly influences user attitudes [Hsu & Lu 2004]. Achieving
critical mass is dependent on the
“perceived” number of actual adopters [Mahler & Rogers 1999]. Despite
Second Life
’s touted popularity, empirical
evidence suggests that most of the virtual world’s spaces are predominantly empty [La Plante 2007]. According

to
Linden Lab, the number of
Second Life

residents stands at 12.5 million [
Second Life

Economic Statistics 2008]. This
number however includes all virtual identities, or avatars, registered on
Second Life

since its inception in 2003.
Because of dead accou
nts, multiple registrations and so on, the number of unique active users of
Second Life

is
estimated to be less than 10% of the official figure [Wagner 2007], and the number of users who are simultaneously
logged on at any given time is only a fraction of
that.

The virtual store entry rate VSER may be negatively affected by

Second Life’
s existing technical limitation that
makes the system unstable whenever more than about 70 avatars meet simultaneously at one single location [BBC
News 2006]. Residents may b
e turned off by the latency of the system [Claypool & Claypool 2006; Hsu & Lu 2004]
and real company events that are designed to promote and attract traffic to virtual stores may hence fail. The
prospect conversion rate PCR, or the probability of an avatar

purchasing a virtual good, may also be negatively
affected by frequent outages of the
Second Life

software. Users in fact experience client crashes that interrupt their
sessions around 22% of the times they are logged in [
Second Life

Virtual Economy Key M
etrics 2008]. This likely
negatively affects user experience and undermines the initiatives of real businesses when the system crashes while
the consumer is in the process of buying a virtual good.
Second Life

is also subject to the more serious hacking
at
tempts [BBC News 2006] that put its user accounts, with the attached personal and credit card information, at risk.
The perceived privacy concerns may decrease trust [Teltzrow et al. 2007] in virtual comme
rce and hence negatively
affect

PCR. The
Second Lif
e
client crashes may also decrease IRVR, the induced real purchase rate, especially when
a user is being redirected to the company’s web store to complete a real transaction.



Figure 3.

Key Factors for Achieving Mature and Sustainable V
-
Commerce Enviro
nments

External Regulatory Environment




Enacting virtual property and virtual contract laws



Upholding virtual civic and consumer rights



Endorsing elements of network neutrality


Virtual World Operators




Providing transparent
information



Allowing a governance structure
inside the virtual world



Providing virtual prope
rty
guarantees



Implementing interoperability
between virtual worlds



Offering integrated business
tools

Real Businesses




Realizing that virtual worlds are
more than just another marketing
channel for real world products



Targeting needs of virtual world
inhabitants (ex: fashion, real
estate)

and
targeting needs that
may have no counterpart in rea
l
life (ex: furries community)



Incorporating social network
structures and consumer
creativity in business strategy

P
artnership

Arakji

& Lang:
Avatar Business Value Analysis

Page
216

Furthermore, Linden Lab’s virtual property policy probably has a negative effect on the prospect conversion
rate PCR, or the probability of avatars buying virtual products. Virtual assets in
Second Life

are mere binary
sequences on a server [Hunter
and Lastowka 2004], which renders their value vulnerable to loss without seller
liability or legal recourse.
Second Life
’s End User License Agreement (EULA) also gives Linden Lab the unlimited
right to modify
Second Life
’s rules, duplicate world content an
d devalue virtual currency or any virtual good at will
[Archinaco 2007]. Unless Linden Lab amends its virtual property policy, users may not have enough trust in the
virtual world operator and may be reluctant to invest real money in virtual assets [Wu & L
iu 2007].



5.

Concluding Remarks

The discussion of business and operator
-
related factors in section 4 clearly shows that virtual worlds like
Second Life

currently fail to achieve their v
-
commerce potential. However, it is important to emphasize that
co
mmerce within a synthetic environment is still in its infancy and likely to improve over time. The specific
performance measures proposed in our ABV Analysis framework provide a useful lens for guiding strategic
responses and operational improvements. Our
analysis also suggests that implementing successful virtual commerce
platforms in the future demands close cooperation and strategic partnerships between the virtual world operators and
the businesses running v
-
commerce operations inside synthetic worlds (
cf.Figure 3).

Companies interested in v
-
commerce need to adapt their strategies to the nature of virtual worlds. They may for
instance seek to participate in and derive some business value from the social networks that develop in synthetic
environments. Pr
oviding outlets for consumer creativity inside a virtual world may even constitute a means for
integrating consumers into the company’s real production chain [Wikström 1996; Goel & Mousavidin 1997; Arakji
& Lang 2007]. Moreover, researching the fantasy beh
avior of virtual consumers such as the Furries, for example,
and understanding their needs and wants would help the real businesses in offering products that specifically target
these new desires.


In addition to providing transparent information about the

size of the virtual resident populations, operators
ought to maintain sound internal governance structures [Lessig 2006] that would serve as a foundation for both civic
and business conduct among resident communities and business entities. This includes a

strong system organizing
virtual property as well as intellectual property over virtual designs and creations. Virtual world operators may also
consider implementing interoperability between various virtual worlds to allow users to transfer their establis
hed
virtual identities and travel between virtual realms. Real business operations may seem less invasive to the
inhabitants of virtual worlds if they have the option of visiting a commercial virtual space then leaving it to a
different business free zone.

Virtual worlds that invite real world investments should also offer additional
functionalities that integrate v
-
commerce with the more general online operations of the real businesses [Bloomfield
2007]. Virtual stores could offer interfaces to conventiona
l e
-
commerce web sites and allow transactions to be
finalized inside the virtual world, instead of redirecting the consumer to the seller’s web store.

While not directly inferred from our ABV Analysis, long
-
term v
-
commerce sustainability further requires
the
development of a comprehensive regulatory environment that organizes virtual world economic activities. There is
first a need for clear protection of virtual property in the legislations [Hunter and Lastowka 2004; Fairfield 2005].
Moreover, since virtu
al worlds have no national boundaries [Goldsmith and Wu 2006] and it is unclear which real
world laws the virtual world users and businesses ought to follow, virtual contract laws may be essential for
protecting the interests of virtual world inhabitants a
nd businesses. Finally, upholding some form of network
neutrality [Wu 2006] that would prohibit the Internet service providers from degrading the speed of delivery of
MMOG content or from imposing surcharges on the use of MMOGs [Frieden 2007] is important
to support
innovation [Economides 2007] in virtual worlds and v
-
commerce practices.

In conclusion, virtual worlds still hold the possibility of radically altering the way we conduct business online
and new business models for virtual stores are likely to b
e innovated. The
Metaverse

may become in the near future
very real indeed.


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